Estate planning involves many different tools. Both living trusts and wills can transfer assets to beneficiaries after a person dies. The major difference is in the way they accomplish these goals. Knowing how living trusts work can help you decide whether they’re useful for you and your family.
What Is a Living Trust?
Living trusts are legal documents that create a fiduciary relationship while you’re still alive. Nolo explains that trusts include a few key parties:
- The trustor
- The trustee
- Successor trustees
- Beneficiaries
The trustor, also called the grantor, is the person who creates a living trust. Primary and successor trustees manage the trust and its assets. Beneficiaries receive assets from the trust after the grantor’s death.
How Do You Create a Trust?
You must write a trust agreement to create a living trust. Your document names you as trustor, your trustees, beneficiaries, and at least one successor trustee. The successor takes over if you die or become incapacitated and unable to manage your affairs. For beneficiaries who are still minors, your trust agreement should also appoint people to manage their assets until they’re adults. Once your trust document is complete, you must sign it with a notary present. Depending on your state’s laws, you may also need witnesses to sign the document.
Most people use revocable trusts in estate planning. Dummies explains that revocable trusts allow the same person to serve as both trustor and trustee. They can also be changed or revoked at any time. But irrevocable trusts permanently give assets away – they’re out of your control after that. These trusts tend to benefit wealthy people, letting them pass money to beneficiaries and shrink their taxable estates.
Do Living Trusts Go Through Probate?
Wills must go through the probate process to confirm their validity and settle estates. Depending on an estate’s complexity, probate can last anywhere from a few weeks to a couple of years. But a living trust doesn’t go through this process. Why? Because it’s not owned by its creators.
Estate planning attorney Julie Garber details how this works. Legally speaking, a trustee owns a revocable living trust’s assets for the benefit of its beneficiaries. And since you technically don’t own those assets when you die, they don’t end up in the probate process. Similarly, irrevocable trusts also avoid the probate process. There’s one caveat, however: Any assets that you forget to place in your trust will go through probate separately. And if there’s no will, your state’s intestacy laws will govern how they’re distributed.
Are There Any Disadvantages to Living Trusts?
Another Nolo piece spells out a living trust’s potential weaknesses. Setting one up involves quite a bit of paperwork. That includes changing title documents on property, vehicles, and investment accounts. Maintaining a trust also requires diligent recordkeeping, namely when you transfer assets into or out of it. There may also be transfer taxes on real estate, and some lenders may not want to refinance property held in trust.
People owning a lot of property with large debt claims against it can also lose out. Probate has cutoff dates for creditors’ claims, but living trusts offer no such protection. Trusts can also be expensive to set up. If you enlist an attorney for help, you could spend between $1,000 and $3,000 creating your trust agreement.
Your Family’s Financial Security
Everyone’s needs are different, and living trusts have both potential benefits and a few drawbacks. They avoid the lengthy probate process and offer flexibility for passing assets to your heirs. At the same time, they can also involve more money and paperwork to create than wills. Your family’s needs should determine how you plan your estate. Whether you use a will, a living trust, or both, you must choose tools that best secure their financial future after you’re gone.
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